Prop. 39 – Yes: Closing tax loophole for out-of-state firms

On Nov. 6, California voters have the opportunity to fix a corporate tax loophole that is costing the state $1 billion a year, and is also giving out-of-state companies a huge advantage over California-based businesses. Proposition 39 will benefit both the San Diego region and California by ending an unfair advantage for out-of-state corporations that make profits selling goods in this state. In fact, Proposition 39 will encourage California-based companies to keep their facilities and employees in California.

Proposition 39 does not increase the taxes of any California-based company, individual or household. Rather, the measure levels the playing field for businesses with facilities and employees in California. It does so by requiring that all corporations, wherever they are based, use the same simple formula to determine their California income tax – the percentage of their sales in California. The current loophole allows out-of-state companies with few facilities or employees in California to select a tax option that allows them to pay less in California taxes than a similar California company. This unfair option is costing California approximately $1 billion a year. Every other large state in the country, including New Jersey, New York and Texas, has passed single sales method laws similar to Proposition 39 in order to create tax fairness for businesses in their state.

Proposition 39 will boost our state’s economy, create thousands of badly needed quality jobs, and increase funding to our schools. For the first five years, Proposition 39 will dedicate half of the revenues from closing the loophole to energy efficiency and clean energy programs that retrofit schools and government buildings. Using existing technology – such as upgrading old heating/cooling systems and swapping out old windows and lighting – this investment will lower building energy bills, saving San Diego taxpayers and employers money by reducing public energy costs for years to come, and reinvigorate the construction and contracting industries undertaking these retrofits. The other half of the revenues for the first five years will go to our state’s general fund – helping to balance the budget and injecting approximately $270 million dollars annually to our threadbare public school system. After five years, all revenue will go into the general fund and more than $540 million per year will be guaranteed to schools.

Despite bipartisan support in the California Legislature, special interests for out-of-state companies with high sales in California have blocked repeated efforts to reverse this loophole, which was created in a middle-of-the-night 2009 budget negotiation between lawmakers in Sacramento. Despite outrageous claims from out-of-state corporations looking to maximize profits – and in most cases be taxed more favorably in California than in their home states – Proposition 39 is a common-sense measure. It is up to us, as voters, to do the right thing and close this loophole.

A favorite argument from opponents of this measure – who otherwise agree Proposition 39 is fiscally sound and closes an absurd loophole – is that Proposition 39 represents what is commonly referred to “ballot-box budgeting” or allowing proposition backers to dictate where and how the revenue generated is spent. However, this philosophical argument against Proposition 39 does not make sense. In a perfect world, our Legislature would not have created this harmful give away to out-of-state companies, or when the mistake was discovered, legislators would have acted quickly to correct it. Unfortunately, in today’s highly polarized political environment, certain legislators will not support any measure involving taxes, even if the outcome is highly beneficial to California and does not affect the in-state individual or business taxpayer.

Even assuming someone feels strongly against “ballot-box budgeting,” it is essential for voters to understand that Proposition 39 only temporarily allocates half the revenue to improving the energy and economic efficiency of public buildings. The measure has been purposefully designed to place all revenue in the unrestricted general fund after the first five years. Since there is no reason to expect the Legislature to correct the current travesty, the next ballot opportunity will be in 2014, two years into the five-year allocation period. It simply makes no sense to continue to hurt California companies and California’s budget because of a disagreement over how half the money will be allocated for three years.

This current unfair tax policy for out-of-state corporations puts California-based businesses at a disadvantage, and encourages them to expand operations and employment in other states. Let’s close this loophole and reinvest in California. Vote yes on Proposition 39.